15. The Scottish Enlightenment
The temptation is to entitle this chapter The Forerunners of Adam Smith, himself a leading product of the Scottish Enlightenment.
The problem, however, is that Smith, in most aspects of economics, was a retrogression and deterioration rather than an advance from his notable predecessors.
By the later seventeenth and during the eighteenth century, the once mighty Oxford and Cambridge universities,
previously in the forefront of thought and scholarship, had deteriorated to being merely the playground of wealthy young men.
Instead, for over a century, the intellectual leadership of Great Britain devolved on the two great universities of Scotland,
the University of Glasgow and, particularly, the University of Edinburgh.
1. The Founder, Gershom Carmichael
The founder of the tradition of academic economics in Scotland was Gershom Carmichael, circa
1672 to 1729. Carmichael's father was a Presbyterian minister who was exiled for heresy by the
of the Scottish Presbyterian-run government. Born in England, Carmichael graduated from
Edinburgh University. He then became regent at St. Andrews and Glasgow universities, where
courses were taught by regents, who were essentially young graduate students. After that, Carmichael
was Presbyterian minister at Fife. When the regenting system was abolished in 1727, Carmichael
Paul was named the first professor of moral philosophy at Glasgow, where he died two years
later.
Economics or political economy was taught as a subset of a course in moral philosophy,
and thus the analysis of trade and the economy was embedded in a groundwork and treatment
of natural law.
In many ways, the 18th century Scottish professors followed the post-medieval and late Spanish
and the Irish Scholastic Method of including economic analysis as one segment of an integrated tome covering ethics, natural law, jurisprudence, ontology and theology, as well as economics proper.
The term Protestant Scholastic has been coined for such writers as John Locke, and indeed the phrase is a coherent one,
Since one does not have to be Catholic to use the rational scholastic method or arrive at scholastic conclusions.
A fascinating example of this was perhaps the first Protestant scholastic, the Dutch jurist Hugo Grotius, 1583-1645.
Grotius, who studied law at the University of Leiden and later became Chief Magistrate of Rotterdam,
was an eminent natural law theorist who brought the concepts of natural law and natural rights
to the Protestant countries of Northern Europe.
In his outstanding work, which made him the founder of international law on the law of war and peace, 1625,
Grotius clearly pushed natural law to its logical and rationalist conclusion.
Even if God did not exist, natural law would still be eternal and absolute.
Such law is discoverable by unaided human reason, and even God could not negate, even
if he wanted to, such natural law insights as 2 plus 2 equals 4.
Natural law required the rights of property to be secure in order to enjoy social cooperation,
And under Grotius' influence, the idea of the rights of property became expanded to
the economic sphere.
In a prefigurement of 18th century natural law, natural rights theory, Grotius believed
in the harmony of human interaction based on free action and property rights.
Grotius had been able to work in the rationalist and natural law tradition because his mentor,
Jacobus Arminius had previously broken off from orthodox Calvinism to stress the freedom
of will of every individual.
On these important matters of social philosophy, the Armenians had what might be called a neo-Catholic
position.
In politics, Grotius was a leader in the classical liberal, free-trade Republican Party in Holland,
and then engaged in their century-long struggle with the monarchist orthodox Calvinists.
Particularly influential on Northern European theorists was the late 16th century Spanish
Jesuit scholastic Francisco Suarez. Suarez and his school heavily influenced two men
who are generally considered founders of modern philosophy, the early 17th century Frenchman
and René Descartes and the late 17th century German Gottfried Leibniz.
Suarez's Metaphysical Disputations was his most influential work, published in Salamanca
in 1597.
Particularly important was the second edition, published in Mainz, Germany in 1600, which
became the leading philosophy textbook in most European universities, both Catholic and Protestant,
for over a century. Leibniz, indeed, referred to the disputations as the philosophia recepta,
the received philosophy.
Suarez's work was heavily influential in Protestant Central Europe, Bohemia, Germany and Holland.
The University of Leiden, a leading academic center in Holland during the 17th century,
was a particular focus of Suarezian dominance, and it was at Leiden that Hugo Grotius pursued
his studies.
Though Gershom Carmichael, who inaugurated the teaching of economics in Scotland, launched
the tradition of reading and studying Grotius, a tradition that was followed by Adam Smith
in the 18th century line of Scottish intellectual descent, more directly important for Carmichael
was Grotius' best-known follower, Samuel Baron von Pufendorf, 1632 to 1694. Pufendorf was
born in Saxony, son of a Lutheran pastor. He first studied theology and then shifted
to mathematics, jurisprudence and natural law. Graduating from the University of Jena,
Pufendorf went to Leiden, where he published his first work on jurisprudence in 1661.
On the basis of this achievement, Carl Ludwig, the Elector Palatine, created for the young
Pufendorf a chair of natural and international law at the University of Heidelberg.
In 1672, while teaching at the University of Lund in Sweden, Pufendorf published his
and his great work, De jure naturai et gentium. The following year he produced the De officio
hominis et civis, a resume or abstract of his great De jure. It turned out, not surprisingly,
that the more concise De officio proved more useful as a teaching tool, and therefore became
and the far more directly influential, if inferior, product of Pufendorf's pen.
Not only did Professor Gershom Carmichael bring the study of the new natural and international
law teachings of Grotius and Pufendorf to British shores, but also he was himself the
English translator of De Officio.
Carmichael published the English translation in 1718, along with extensive notes and a
supplementary commentary.
This work turned out to be Carmichael's most important achievement, certainly in economics
or the social sciences.
Six years later, Carmichael published an improved second edition of De Officio, and this edition
was reprinted in 1769.
Carmichael saw to it that his students were steeped in Pufendorf and in his own commentaries.
Carmichael was the first teacher in Scotland to expound Locke, Leibniz and Descartes as
well as Grotius and Pufendorf.
A knowledgeable observer has called Gershom Carmichael the true founder of the Scottish
School of Philosophy.
A contemporary noted that he was a very great reputation and was exceedingly valued both
both at home and abroad.
So much so, in fact, that another observer noted that on Mr Carmichael's death all the
English students have left the University, and indeed it's very thin this winter, and
his name and reputation brought many to it.
Thus Carmichael led the way in the emerging custom of bright English students deserting
at Oxbridge and Going Up to a Scottish University for Intellectual Attainment.
On Carmichael's commentary on the De Officio, the testimony of Carmichael's most distinguished
student, Francis Hutchison, is telling.
Pufendorf's smaller work, De Officio Hominus et Civis, which that worthy and ingenious
man the late Professor Gershom Carmichael of Glasgow, by far the best commentator on that
Book has so supplied and corrected that the notes are of much more value than the text.
Samuel von Pufendorf, like the 18th century French and Spanish scholastics, was a pre-Austrian
subjective utility scarcity theorist.
That is, he believed that the value of goods on the market was determined by their common
Common Valuation Placed on Them by the Consumers, and that the more abundant the supply, the
lower the value.
Thus Pufendorf.
Of common value the foundation is that aptitude of the good or service by which it helps directly
or indirectly to meet human needs.
Yet there are some things most useful for human life upon which no definite value is
set.
The necessity of the good or its great usefulness are so far from always being the first determinant
that we can observe men putting a very low value on what is indispensable to human life.
This is because nature gives us a plentiful supply of such goods.
In fact, a high value proceeds from scarcity.
In his notes to Pufendorf, Carmichael adds some valuable and not so valuable insights.
He stresses the subjective nature of utility, pointing out that the usefulness of a good,
which is essential to its value, may be either real or imagined.
Unfortunately, he also muddied the waters by adding to scarcity as a determinant of
of Value, The Difficulty of Acquiring Goods, An Obvious Real-Cost Attempt to Measure the
Value of Goods by the Effort Put into Their Production.
2.
Francis Hutchison, Teacher of Adam Smith
Carmichael's most prominent student and follower was his successor at the Chair of Moral Philosophy
at Glasgow, Francis Hutchison, 1694-1746. Hutchison, too, was the son of a Presbyterian
minister of Ulster Scottish or Scots-Irish Stock, who was born in Ireland. Educated in
Glasgow and then Dublin, Hutchison succeeded to the moral philosophy chair at Glasgow in
1730, upon the demise of Carmichael, where he taught until his death 16 years later.
Hutchison brought to Scottish philosophy a solid belief in natural rights and the beneficence
of nature. Hence, Hutchison brought to Scottish thought the basic classical liberal worldview.
Francis Hutchison was a stimulating and dynamic lecturer who introduced the style of pacing
The Never-to-be-forgotten Dr. Hutchison, as Adam Smith referred to him in a letter half
a century later, was the first Glasgow professor to teach in English instead of Latin, and
also the first to become friend, guardian and even banker to his students. His lectures
on philosophy, politics, law, ethics and political economy drew students from all over Britain,
The most famous of whom was Adam Smith, who studied under him from 1737 to 1740.
Hutchison's major work, The System of Moral Philosophy, 1755, was published by his son
after his death.
Hutchison's treatment of value in his system is virtually identical to that of Pufendorf.
Again, utility and scarcity are the determinants of value.
Starting with the statement, when there is no demand, there is no price, Hutchison also
points out that some highly useful things, such as air and water, have little or no value
because of the bountiful supply furnished by nature. An increasingly scarce supply will
raise the value or price of a good, a more abundant supply will lower them. Furthermore,
Hutchison perceptively defines use highly subjectively, not simply as a good which
naturally yields pleasure, but as any tendency to give any satisfaction by prevailing custom
or fancy.
Unfortunately, however, Hutchison also took the Carmichael confusion about real costs
and escalated it.
For Hutchison not only brought in the difficulty of labor as a determinant, he also made it
even more determining where the demand for two sorts of goods is equal.
Foreshadowing Adam Smith's famous analysis, Francis Hutchison stressed the importance
of an advancing division of labor in economic growth.
on the market involves reciprocal aid through mutually beneficial exchange, a prime example
of the beneficence of nature.
The division of labor is a key to the preservation of human life, and Hutchison shows the enormous
advantages of specialization, skill and exchange over the puny productivity of an isolated
Crusoe. Extended division of labor also connotes a more extensive communication of knowledge
and permits greater use of machinery in production. In his analysis of money, Hutchison set forth
an analysis of which commodities are likely to be chosen as money on the market that used
to be standard in money and banking texts until governments destroyed the gold standard
in the early 1930s. Money, Hutchison pointed out, is a commodity generally accepted in
a particular country that becomes used as a general medium of exchange and as a common
standard of value and measure for economic calculation. Commodities which are chosen
as money on the market are those with the most moneyish qualities, already generally
Very desirable and acceptable in exchange, divisible into small quantities without losing
their pro-rata share of value, durable for long periods of time, and portable, for which
quality they must have a high value per unit weight.
Generally, he pointed out, silver and gold have been the two commodities that have been
are chosen as by far the most suitable as money, with coins becoming the most popular form precisely for being divisible and easily carrying a warrant of purity.
Debasement of coins increases their supply proportionately and raises prices of goods in terms of the money unit.
As in the case of all other goods, an increase in the supply of gold or silver, Hutchison
pointed out, lowers their value in terms of other goods, that is, increases their prices
in terms of specie.
Hutchison's most impressive achievement was his sharp rebuttal of the satiric Bernard
de Mendeville, 1670-1733, whose enormously popular Fable of the Bees, or Private Vice's
Public Benefits, was published in 1714 and expanded and reprinted in several editions
over the next fifteen years.
In a pre-physiocratic, proto-Keynesian piece of mischief, the fable maintained that the
The Vice of Luxury, no matter how deplorable, performs the important economic function of maintaining the prosperity of the economy.
Many historians, especially F. A. von Hayek, have held Mandeville to be a forerunner of Smithian laissez-faire,
since Smith held that individual self-interest is harmonized with the interests of all through the operation of competition and the free market.
But the intent and the analysis are very different, for Mandeville stressed the alleged paradox of private vice public benefits, and the benefit was to come through the pre-Keynesian mechanism of consumption spending.
Mandeville, furthermore, did not in any sense draw laissez-faire conclusions from this analysis.
On the contrary, in a letter to Dion, 1732, published shortly before his death, Mandeville
insisted that not the free market, but the wisdom and dexterous management of a skillful
politician are needed to transform private vices into public gain.
Mandeville's work, furthermore, was virtually the living embodiment of what the 19th century
Every French laissez-faire economist, Frederic Bastiat, would call the broken window fallacy.
Mandeville not only defended the importance of luxury, but also of fraud as providing
work for lawyers and theft for having the virtue of employing locksmiths.
And then there was Mandeville's classically imbecilic defense in his Fable of the Bees
of the Great Fire of London.
The fire of London was a great calamity.
But if the carpenters, bricklayers, smiths and all, not only that are employed in building,
but likewise those that made and dealt in the same manufactures and other merchandises
that were burnt, and other trades again that got by them when they were in full employed,
were to vote against those who lost by the fire, the rejoicings would equal, if not exceed,
The Complaints, Keynesianism Gone Mad, or rather, carried to its consistent conclusion.
Mandeville's defense of the vice of luxury was enough to outrage both the rational economist
and the Presbyterian in Francis Hutcheson.
In rebuttal, in a prefigurement of Say's law, he pointed out that income not spent in one
in one way will be spent in another, and if not wasted in luxury will be devoted to useful prudent purposes.
Luxurious spending, then, is scarcely necessary for economic prosperity.
In fact, he went on, it is the thrifty and the industrious who provide prosperity by supplying goods to the public.
Declared Hutchison, the good arising to the public is in no way owing to the luxurious, intemperate or proud, but to the industrious, who must supply all customers.
Ridiculing Mandeville, the ordinarily sober Hutchison reposted,
Who needs to be surprised that luxury or pride are made necessary to public good,
when even theft and robbery are supposed by the same author, Mandeville, to be subservient to it, by employing locksmiths?
The money saved by not spending on luxury or locks would be profitably employed elsewhere,
unless all other wants had been totally saturated, that is, unless all men be already so well
provided with all sorts of convenient utensils that nothing can be added.
As a general proposition, Hutcheson called for liberty and the natural right of property.
As he put it in his system, each one has a natural right to exert his powers according
according to his own judgment and inclination for those purposes in all such industry, labor,
or amusements as are not harmful to others in their persons or goods, while no more public
interest necessarily require his labors.
This right we call natural liberty.
An unexceptionable statement, except for the ominous vagueness in the concept of public
Hutchison's devotion to laissez-faire, however, was limited and guarded.
Thus, in his Introduction to Moral Philosophy, he opines that the populace often needs also
to be taught and engaged by laws into the best methods of managing their own affairs
and exercising their mechanic arts.
In international trade, for example, Hutchison was mired in old-fashioned mercantilism, advocating
state regulation to ensure a favorable balance of trade and high protective tariffs, as well
as government subsidies of shipping to develop industry.
Hutchison's devotion to natural rights was weakened still further by his being the first
to adumbrate the chimerical and disastrous formula of utilitarianism, the greatest happiness
for the greatest number, possibly after having acquired it or its equivalent from Gershom
Carmichael.
The specific influences of Hutchison on Adam Smith will be detailed further below.
Suffice it to say here that the order of topics of Hutchison's lectures as published in the
System, and as heard by Young Smith at the University of Glasgow, is almost the same
as the Order of Chapters in the Wealth of Nations.
3.
The Scottish Enlightenment and Presbyterianism.
The Enlightenment was a general movement in European thought in the 18th century that
stressed the power of human reason to discern truth.
Originally it was dedicated to natural law and natural rights, although in the later
years of the century it began to shade off into utilitarianism.
While scholasticism was compatible with an emphasis on natural law and natural rights,
it was generally discarded and reviled as ignorant superstition along with revealed
religion.
In religion, therefore, Enlightenment thinkers tended to discard Christianity, attack the
In this atmosphere, corrosive of Christian faith and values, it is remarkable that the
Scottish Enlightenment was linked very closely with the Presbyterian Church.
How did this happen?
How did a Scottish kirk, which in the 16th century, under the aegis of John Knox, had
had been fiery and militant, become softened into a church that welcomed the enlightenment,
that is, natural law, reason, and latitudinarian, if not skeptical, Christianity.
The answer is that in the two centuries since John Knox, the hard-nosed Calvinist faith
had weakened in Scotland.
In particular, after 1752, a powerful group of moderate Presbyterian clergy was able to
to take over and dominate the Church of Scotland, the established Church, which, since the Union
of Scotland and England in 1707, had been established by the British Crown, even though
it was Presbyterian rather than Anglican, as was the Church of England.
Bitterly opposed to the moderates were the evangelical party, that is, clergy true to
the basic Calvinist faith.
The well-connected and highly educated moderates, strong in the lowland areas of Edinburgh and
Glasgow and on the east coast up to Aberdeen, were able to form the dominant power elite
in the Church of Scotland after the 1750s, even though they represented a minority of
the local Kirks.
The moderates, embodying a soft and latitudinarian theological outlook, were intimately connected
with the Edinburgh and Glasgow intellectuals who constituted the Scottish Enlightenment.
Most of their tactics were planned in meetings in Edinburgh taverns.
The dominant figure among the moderates was the Rev. William Robertson, 1721-1793, an
incessant talker and indefatigable organizer who led the moderates since their formation
in 1752, and who became the moderator, or head, of the General Assembly of the Church
of Scotland from 1766 to 1780.
In 1762, furthermore, Robertson became the principal of the University of Edinburgh,
and it was his leadership and administration that vaulted Edinburgh into the front ranks
of European universities.
Robertson was also the founder and leading light of various learned societies, which
brought together weekly for papers, discussion and socializing the leading figures of the
Scottish Enlightenment, including university professors, lawyers and the major figures
of the moderate clergy.
Thus Robertson founded the Select Society of Edinburgh in 1750.
During the 1750s, the select society met weekly and included in its ranks such university
figures as Robertson, David Hume, Adam Ferguson and Adam Smith, classical liberal lawyers
such as Henry Hume, Lord Kames, and Alexander Wedderburn, later Lord Chancellor of Great
Britain, and such youthful but prominent moderate clergy as Robertson, Alexander Jupiter Carlisle,
Robert Wallace, Hugh Blair, John Hume and John Jardine.
Carlyle was a charismatic figure as well as a heavy drinker, as many moderate clergymen
were in that era.
Wallace was in charge of Church of Scotland patronage as well as being royal chaplain.
Wallace in his private papers favored illicit sex almost to the point of promiscuity, quickly
A Warning that the activity would have to be kept hidden.
Blair, in addition to his duties in the clergy, was professor of rhetoric at the University
of Edinburgh.
Jardine was a shrewd politician whose daughter married the son of Lord Cames, who in turn
was a cousin of David Hume.
John Hume was a moderate clergyman and secretary to Lord Bute, close friend of David Hume and
and a playwright, an activity which in itself was a matter of deep suspicion to the dour
fundamentalist evangelical clergy.
Thus, Hume wrote a play, Douglas, in 1756, which was put on with many top leaders of
the moderate Enlightenment acting in the play, including the Reverend Robertson, Alexander
Carlyle, David Hume, Hugh Blair and the Reverend Adam Ferguson, professor of moral philosophy
at the University of Edinburgh.
The lax views of the moderates were under constant attack from the evangelical forces.
Particular targets were Lord Keynes and especially the philosopher David Hume, who was almost
excommunicated for heresy by the General Assembly of the Church of Scotland, but was saved
by his powerful moderate friends.
and his moderate university connections, however, could not gain for Hume any post in a Scottish
university, so great was the enmity of the Presbyterian evangelicals.
It should be noted that one of the key leaders of the moderate party was none other than
Francis Hutchison.
Thus the Enlightenment intellectuals, philosophers and economists of 18th century Scotland were
are intimately connected with the fortunes and the institutions of the establishment moderate wing of the Church of Scotland.
Hutchison, Hume and Smith then, while scarcely orthodox Calvinists, were dedicated Presbyterians according to their own lights,
and hence their rationalism and theological laxity were nevertheless infused from time to time with hard-nosed Presbyterian values.
4. David Hume and the Theory of Money
David Hume, 1711-1776, the famous Scottish philosopher, was a close friend of Adam Smith,
who was named Smith's executor, an acquaintance of Turgot and the French adherents of laissez-faire,
and member of the moderate elite of the Scottish Enlightenment. Born in Edinburgh, the son of
of a Scottish Lord, Hume studied on the continent, where he published his epical philosophical
work A Treatise of Human Nature, 1739 and 1740, at the age of 28.
Hume's treatise was pivotal in its corrosive and destructive skepticism, managing unfairly
to discredit the philosophy of natural law, to create an artificial split between fact
and Value, and therefore to cripple the concept of natural rights on behalf of utilitarianism,
and indeed to undermine the entire classical realist analysis of cause and effect.
There is no figure more important in the unfortunate discrediting of the classical philosophical
tradition of natural law realism, a tradition that had lasted from Plato and Aristotle at
at least through Aquinas and the late scholastics. In a sense, Hume completed the corrosive effect
of the 17th century French philosopher René Descartes' influential view that only the
precisely mathematical and analytic could provide certain knowledge. Hume's skeptical
and shaky empiricism was the other side of the Cartesian coin.
While highly influential in later decades, Hume's treatise was ignored in his own day,
and after writing it, he turned to brief essays on political and economic topics, and eventually
to his then-famous multi-volume History of England, which he presented from a Tory point
of view.
Barred from academia for his skepticism and alleged irreligion, Hume joined the diplomatic
Corps and served as Secretary to Lord Hertford, the British Ambassador to France.
In 1765, Hume became the British Chargé d'affaires in Paris and two years later rose to the post
of Under-Secretary of State.
Finally, in 1769, Hume retired to Edinburgh.
Hume's contribution to economics is fragmentary and consists of approximately 100 pages of
of Essays in his Political Discourses, 1752.
The essays are distinguished for their lucid and even sparkling style, a style that shone
in comparison to his learned but plotting contemporaries.
Hume's most important contribution is his elucidation of monetary theory, in particular
his clear exposition of the price-specie-flow mechanism that equilibrates national balances
of Payments and International Price Levels.
In monetary theory proper, Hume vivifies the Lockean quantity theory of money with a marvelous
illustration, highlighting the fact that it doesn't matter what the quantity of money
may be in any given country.
Any quantity, smaller or larger, will suffice to do money's work of facilitating exchange.
Boehm pointed up this important truth by postulating what would happen if every individual overnight
should find the stock of money in his possession to have doubled miraculously.
For suppose that, by miracle, every man in Great Britain should have five pounds slipped
into his pocket in one night.
This would much more than double the whole money that is at present in the kingdom.
That there would not next day, nor for some time, be any more lenders, nor any variation
in the interest.
Prices then, following Locke's quantity theory of money, will increase proportionately.
The price-specie flow mechanism is the quantity theory extrapolated into the case of many
countries.
The rise in the supply of money in country A will cause its prices to rise.
But then the goods of country A are no longer as competitive compared to other countries.
Exports will therefore decline, and imports from other countries with cheaper goods will
rise.
The balance of trade in country A will therefore become unfavorable, and specie will flow out
of A in order to pay for the deficit.
But this outflow of specie will eventually cause a sharp contraction of the supply of
money in country A, a proportional fall in prices and an end to, indeed, a reversal of
the unfavorable balance.
As prices in A fall back to previous levels, specie will flow back in until the balance
Balance of trade is in balance, and until the price levels in terms of species are equal
in each country.
Thus, on the free market, there is a rapidly self-correcting force at work that equilibrates
balances of payments and price levels and prevents an inflation from going very far
in any given country.
While Hume's discussion is lucid and engaging, it is a considerable deterioration from that
of Richard Cantillon.
First, Cantillon did not believe in aggregate proportionality of money and price level changes,
instead engaging in a sophisticated microprocess analysis of money going from one person to
the next.
As a result, money and prices will not rise proportionately even in the eventual new equilibrium
state.
Second, Cantillon included the income effect of more money in a country, whereas Hume confined
himself to the aggregate price effect.
In short, if the money supply in country A increases, it will equilibrate not only by
prices rising in A, but also by the fact that monetary assets and incomes are higher in
Section A, and therefore more money will be spent on imports.
This income, or more precisely the cash balance effect, will generally work faster than the
price effect.
There are more problems with Hume's analysis, problems other than the omission of previously
discovered truths.
For while Hume conceded that it does not matter for production or prosperity what the level
of the Money Supply may be, he did lay great importance on changes in that supply.
Now it is true that changes do have important consequences, some of which Cartillon had
already analyzed.
But the crucial point is that all such changes are disruptive and distort market activity
and the allocation of resources.
David Hume, on the contrary, in a pre-Keynesian fashion, hailed the allegedly vivifying effects
of increases in the quantity of money upon prosperity, and called upon the government
to make sure that the supply of money is always at least moderately increasing.
The two contradictory prescriptions of Hume for the supply of money are actually presented
in two successive sentences.
From the whole of this reasoning we may conclude that it is of no manner of consequence with
regard to the domestic happiness of a state, whether money be in a greater or less quantity.
The good policy of the magistrate consists only in keeping it, if possible, still increasing,
because by that means he keeps alive a spirit of industry in the nation.
Hume goes on, in proto-Keynesian fashion, to claim that the invigorating effect of increasing
the supply of money occurs because employment of labor and other resources increases long
before prices begin to rise.
But Hume stops, as Keynes did, just as the problem becomes interesting.
For then it must be asked, why were resources underemployed before, and what is there about
about an increase in the money supply that might add to their employment.
As W. H. Hutt was to point out in the 1930s, deeper reflection would show that the only
possible reason for unwanted unemployment of resources is if the resource owner demands
too high a price or wage for its use, and more money could only reduce such unemployment
when selling prices rise before wages or the price of resources, so that workers or other
resource owners are fooled into working for a lower real, though not lower money, wage.
Furthermore, why should idle resources, as Hume implicitly postulates, reappear after
the effects of new money have been fully digested in the economy in the form of higher prices?
The answer can only be that after the price increases are accomplished and a new equilibrium
attained, wages and other resource prices have caught up, and the money illusion has
evaporated.
Real resource prices return to being excessively high for the full employment of resources.
Hume's inner contradictions on the quantity of money and inflation permeate his meager
and other writings on economics. On the one hand, continuing inflation over the centuries
is depicted as bringing about economic growth. On the other, Hume sternly favored ultra-hard
money in relation to the banking system. Thus Hume delivered a hard-hitting attack on the
unproductive and inflationary nature of the very existence of fractional reserve banking.
He wrote of, Those institutions of banks, funds and paper credit, with which we are
in the kingdom so much infatuated, these render paper equivalent to money, circulate it throughout
the whole State, make it supply the place of gold and silver, raise proportionately
the price of labor and commodities, and by that means either banish a great part of those
as Precious Metals, or prevent their further increase.
What can be more short-sighted than our reasoning on this head?
We fancy, because an individual would be much richer were his stock of money doubled, that
the same good effect would follow were the money of everyone increased, not considering
that this would raise as much the price of every commodity, and reduce every man in time
to the same condition as before.
Elsewhere, Hume noted that inconveniences result from the increase of genuine money
– specie – but at least they are compensated by the advantages which we reap from the possession
of these precious metals, including bargaining power in negotiations with other nations.
That he added, there appears no reason for increasing that inconvenience by a counterfeit
money, which foreigners will not accept of in any payment, and which any great disorder
in the State will reduce to nothing.
To endeavor to increase paper credit artificially, then, merely increases money beyond its natural
Proportion to Labor and Commodities, thereby increasing their prices.
Hume concluded his penetrating analysis with an ultra-hard money policy proposal, one hundred
percent specie reserve banking.
It must be allowed that no bank could be more advantageous than such a loan as locked up
Another important flaw in Hume's analysis of money was his propensity, picked up and
magnified by Smith, Ricardo and the classical school, for leaping from one long-run equilibrium
from State to Another without bothering about the dynamic process through time by which
the real world actually moves from one state to another.
It is this brusque neglect or comparative statics that leads Hume to omit the cationian
analysis of microchanges in cash balances and income, and that causes him to neglect
Income Effects in the Price-Specie Flow Mechanism of International Monetary Adjustment.
Ironically, by doing so, and thereby neglecting the distribution effects of changing assets
and incomes during the process, Hume, as well as countless other economists following him,
distorts what happens in equilibrium itself, for they then cannot see that the new equilibrium
will be very different from the old.
Thus, when the money supply changes, there will not be an equiproportionate increase
in all prices across the board.
Professor Salerno puts the point very well.
There is some truth to Cain's statement that Hume began the practice amongst economists
of stressing the importance of the equilibrium position as compared with the ever-shifting
and Transition towards it.
For in reading Hume, one gets an unmistakable whiff, if not the full flavor, of the notion
that it is in the states of long-run equilibrium that the economy actually resides most of
the time.
The transition between these states, Hume conceives as proceeding rapidly and terminating
before another change in the economic data can intervene and propel the economy toward
a new equilibrium.
This notion at times leads Hume to truncate a full step-by-step analysis of a given change
in the data, thus sliding or skipping over altogether its short-run effects in order
to focus upon a comparative static analysis of its ultimate consequences.
In reality, as the Austrians have emphasized, the situation is precisely the reverse of
the Hume-British classical assumptions. Rather than the long-run equilibrium state being
the fundamental reality, it never exists at all. Long-run equilibrium provides the tendency
towards which the market is ever moving, but is never reached, because the underlying data
of Supply and Demand, and therefore the ultimate equilibrium point, are always changing.
Hence a full step-by-step analysis of a given change in the data is precisely what is needed
to explain the process of successive short-run states which tend towards but never reach
equilibrium.
In the real world, the long run is not equilibrium at all, but a series of such short-run states,
which will keep changing direction as underlying data are altered.
A final problem with Hume's monetary views is that in contrast to the French laissez-faire
school, he believed that money need not be a useful marketable commodity, but was a mere
convention.
According to Abbé André Morelle, 1727-1819, a disciple of Gournay and life-long friend
of Turgot, Hume opines that money functions as such because of the belief that others
would accept it.
Very true.
But this does not mean that money originated as a mere convention.
And Hume acknowledges that money should be made of materials which have intrinsic value,
or otherwise it would be multiplied without end and would sink to nothing.
Hume's thoughts on interest are illuminating if only in contrast to the profundity and brilliance
of Turgot's exposition twenty years later.
Since money's impact is ultimately on prices only, Hume shows that interest can only be
a phenomenon of real capital rather than of money.
He discusses the relation between interest rates and profit rates, that is, the fundamental
rates of return on investment.
Here he points out correctly that no man will accept of low profits where he can have high
interest, and no man will accept of low interest where he can have high profits.
In short, interest and profit rates tend to be equal on the market.
Hume characteristically abandons the search for cause and says that both arise from an
extensive commerce and mutually forward each other.
Boehm-Bawerk is surely right when he says that this view is somewhat superficial.
But more than that, it is incorrect and reverses cause and effect, by stating that extensive
commerce, by producing large stocks, capital, diminishes both interest and profits.
For there is no reason why larger stocks of capital should lower interest or profit rates.
What they do lower is the prices of capital goods and consumer goods.
The causal chain is the other way round.
Lower time preference rates, which usually but not always attend higher standards of
living and greater prosperity, will cause both capital to accumulate and profit and
interest rates to fall.
The two, as the Austrian School would later point out, are different sides of the same
coin.
According to the other areas of economics, it is possible that some of the deep flaws
in Adam Smith's value theory were the result of David Hume's influence.
For Hume had no systematic theory of value and had no idea whatever of utility as a determinant
of value.
If anything, he kept stressing that labor was the source of all value.
In political economy, David Hume may be considered a free trader and opponent of mercantilism.
A friend and mentor of Adam Smith from their first meeting in 1752, Hume came to know the
French laissez-faire during his years in that country, and Turgot himself translated Hume's
and its Political Discourses into French.